Governor Waller, a policymaker at the US Federal Reserve, has developed a knack of guiding markets with his speeches. In this most recent speech “There’s Still No Rush” he indicated that recent economic data suggests to him that the Fed should be in no hurry to start cutting policy rates.
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Christopher J. Waller has gained a reputation as a reliable barometer for sentiment within the policymaking Federal Open Market Committee (FOMC) over the last couple of years. Just reviewing the titles of his speeches over the last six months gives an overview of developments in the US economy.
“Something’s Got to Give”
On 18 October 2023, Governor Waller spoke about the apparent conflict between the strength of the US economy in the third quarter of 2023 and continued progress toward the FOMC’s 2% inflation target. He opined that either economic activity had to moderate or progress on lowering inflation would stop.
“Something Appears to Be Giving“
His words in October seemed to have effect. By late November, Waller noted that economic data was showing signs of moderating in the fourth quarter of 2023, although inflation remained too high. This dovish speech was a good forewarning of Fed Chair Jerome Powell’s pivot at the December FOMC press conference when he surprised investors by making it clear that the US central bank was thinking about rate cuts much earlier than the market had anticipated.
US inflation data so far this year suggests Chair Powell’s pivot in December may have been premature. At the time, it prompted markets to enter 2024 pricing between six and seven rate cuts by the Federal Reserve over the course of the year. Those expectations have since been revised down to just two to three rate cuts on account of sticky inflation in the first quarter.
“Almost as Good as It Gets…But Will It Last?”
Governor Waller began the New Year with this speech on 16 January in which he acknowledged the Goldilocks-like conditions in the US economy: “Real gross domestic product (GDP) is expected to have grown between 1 and 2 percent in the fourth quarter [the actual figure was 3.4% SAAR], unemployment is still below 4 percent, and core personal consumption expenditure (PCE) inflation has been running close to 2 percent for the last 6 months. For a macroeconomist, this is almost as good as it gets.”
“There’s still no rush”
In his latest speech,on 27 March, Governor Waller indicated that recent data suggests to him that it is appropriate for the Fed to reduce the number of rate cuts in 2024 or push them further into the future (though he does still see it likely appropriate for the Fed to begin the process this year). As for the criteria, it will come down to “at least a couple months of better inflation data” to gain sufficient confidence.
Latest data suggests the Fed will remain cautious
Data released on 29 March in the wake of Governor Waller’s most recent speech showed US prices increased moderately in February, but progress towards the Fed’s 2% target has been slow.
The headline PCE price index rose by 0.3% in February. Data for January was revised higher to show the PCE index climbing by 0.4% instead of 0.3% as previously reported.
In the 12 months through February, PCE inflation advanced by 2.5% after increasing by 2.4% in January. This was broadly in line with expectations. Price pressures are subsiding, though the pace of disinflation has slowed.
Speaking after publication of the report, Chair Powell indicated the data did not undermine the Fed’s baseline outlook, but said that with the US economy on a ‘strong footing’, the US central bank does not need to be in a hurry to cut policy rates.
In the wake of this data, financial markets reduced the probability of a 25-basis-point cut by the June FOMC meeting. The probability assigned by markets is now down to about 50/50. Two months ago, three cuts were being priced as a virtual certainty. For the first time since last October, a little doubt is creeping into expectations that the Fed will have made a cut even by its July meeting.
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